3.3 Revenues, Costs And Profits

Question 1

What is total revenue (TR)?

Answer 1

The total amount of money coming into the business through the sale of goods and services: quantity x price

Question 2

What is average revenue (AR)?

Answer 2

The total revenue divided by output

Question 3

Define marginal revenue (MR).

Answer 3

The extra revenue that the firm earns from selling one more unit of production

Question 4

What is the relationship between price elasticity and marginal revenue?

Answer 4

If MR is positive, demand is elastic; if MR is negative, demand is inelastic; if MR=0, demand is unitary elastic

Question 5

True or False: In perfect competition, MR=AR=D.

Answer 5

True

Question 6

What characterizes a downward sloping demand curve?

Answer 6

Price decreases as output increases, indicating some price setting power

Question 7

What happens to total revenue (TR) when marginal revenue (MR) is positive?

Answer 7

TR increases as output increases

Question 8

What occurs at the point where MR=0?

Answer 8

Total revenue is maximized

Question 9

What is the economic cost of production?

Answer 9

The opportunity cost of production; value that could have been generated in the next best use

Question 10

Differentiate between total fixed cost (TFC) and total variable cost (TVC).

Answer 10

TFC does not change with output; TVC changes directly with output

Question 11

What does the average total cost (ATC) represent?

Answer 11

Total costs divided by output

Question 12

Fill in the blank: The law of _______ states that if a variable factor is increased when another factor is fixed, marginal output will decrease.

Answer 12

Diminishing Returns

Question 13

What shape is the average total cost curve (ATC) and why?

Answer 13

U-Shaped due to the law of diminishing marginal productivity

Question 14

When does the marginal cost (MC) curve intersect the average cost (AC) curve?

Answer 14

At the lowest point on the AC curve

Question 15

What is the minimum efficient scale?

Answer 15

The minimum level of output needed for a business to fully exploit economies of scale

Question 16

What are internal economies of scale?

Answer 16

Advantages a firm enjoys due to its own growth

Question 17

Name two types of internal economies of scale.

Answer 17

• Technical economies
• Financial economies

Question 18

What are diseconomies of scale?

Answer 18

Disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise

Question 19

What are external economies of scale?

Answer 19

Advantages arising from the growth of the industry, independent of the firm

Question 20

How do large firms benefit from purchasing economies?

Answer 20

They can buy in bulk and often at lower prices than smaller competitors

Question 21

What is the effect of geography on diseconomies of scale?

Answer 21

Transportation of finished products over long distances can increase costs and complicate management

Question 22

Fill in the blank: A firm experiences _______ returns to scale when output increases by a smaller percentage than inputs.

Answer 22

Decreasing

Question 23

True or False: Constant returns to scale occur when firms increase inputs and receive an equal percentage increase in output.

Answer 23

True

Question 24

What is the relationship between short-run average cost (SRAC) and long-run average cost (LRAC) curves?

Answer 24

LRAC is an envelope for all associated SRAC curves

Question 25

What happens to the average fixed cost curve (AFC) as output increases?

Answer 25

AFC falls as fixed costs are divided by a larger output

Question 26

What is the significance of the point where the LRAC curve levels off?

Answer 26

It indicates the minimum efficient scale

Question 27

What are diseconomies of scale?

Answer 27

Diseconomies of scale occur when a firm's costs per unit increase as it grows larger.

Question 28

How can workers' motivation be affected in a large business?

Answer 28

Workers may feel their efforts go unnoticed, leading to decreased motivation and personal commitment.

Question 29

What geographical issues can large firms face?

Answer 29

Large firms may struggle with the transportation of finished products over long distances and controlling distant parts of the business.

Question 30

Why might a large firm struggle to respond to change?

Answer 30

It takes much longer and is more difficult for a large firm to adapt to changes.

Question 31

How does the demand for raw materials affect production costs in a growing business?

Answer 31

Increased demand for raw materials can raise prices and thus increase production costs.

Question 32

What are the challenges of management in a growing business?

Answer 32

Coordination and control become more difficult, leading to poorer quality work and less effective business decisions.

Question 33

How does communication change in a large business?

Answer 33

Communication can become slow and lose accuracy due to distance and the number of people involved.

Question 34

What is the definition of profit?

Answer 34

Profit is the difference between revenue and costs.

Question 35

What is the condition for profit maximization?

Answer 35

Profit is maximized when total revenue (TR) is above total costs (TC) and when marginal cost (MC) equals marginal revenue (MR).

Question 36

What is normal profit?

Answer 36

Normal profit is the return sufficient to keep the factors of production committed to the business.

Question 37

What indicates supernormal profit?

Answer 37

Supernormal profit occurs when average revenue (AR) is greater than average cost (AC) or when total revenue (TR) exceeds total costs (TC).

Question 38

What constitutes a loss for a firm?

Answer 38

A loss occurs when average revenue (AR) is less than average cost (AC) or when total revenue (TR) is less than total costs (TC).

Question 39

What is the short-run shut-down point?

Answer 39

The short-run shut-down point is where average variable cost (AVC) equals average revenue (AR).

Question 40

When should a firm continue production despite making a loss?

Answer 40

A firm should continue production if AVC is less than AR, as it helps to cover some fixed costs.

Question 41

When should a firm shut down immediately?

Answer 41

A firm should shut down if AVC is greater than AR, as producing more will increase the loss.

Question 42

What is the long-run requirement for a firm to stay in the industry?

Answer 42

In the long run, a firm needs to make at least normal profit to remain in the industry.

Question 43

What is the relationship between MR and MC at the profit-maximizing output?

Answer 43

The profit-maximizing output occurs where marginal revenue (MR) equals marginal cost (MC).

Question 44

Fill in the blank: A loss is where the firm fails to cover its costs, _______.

Answer 44

AR < AC or TR < TC